Futures contracts can be used by
hedgers and by those who speculate.
Producers or buyers of a commodity of an underlying asset are able to
hedge or lock in a price at which the underlying asset can be bought or sold.

Retail traders and portfolio managers
can position themselves to potential profit by the price movement of the
underlying asset.

Futures contracts are available for a
variety of different assets. These
include stock exchange indexes, currencies and commodities.

Futures contracts which are bought and sold over exchanges
are standardized.

A futures contract is a derivative. A
derivative “derives” its value from the movement in price of another
instrument. A derivative bases its value on the changes in the price of the
instrument that it is based upon. As an example, the value of a derivative can
be linked to an instrument such as gold. Gold futures are based upon the price
of the underlying commodity gold.

“A futures contract is a legal agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future. Futures contracts are standardized to facilitate trading on a futures exchange and, depending on the underlying asset being traded, detail the quality and quantity of the commodity.” Source: Investopedia.com. Investopedia Definition of Futures

Standardized contracts have specifications such as:

the unit of measurement,

the type of settlement which can be physical or
cash,

the currency unit the contract for which it is
denominated,

the currency of the contract for which it is
quoted,

and the quality or grade of the particular
instrument (for instance the grade of oil or fuel).

Futures contacts can either be cash
settled, or may call for the physical delivery of the underlying. A retail
trader is probably not interested in delivering or receiving the physical asset
of the underlying. The retail trader is
usually more interested in securing a profit from the movement in the price of
the underlying commodity.

Some brokerages will automatically
close a futures contract before it expires.
This prevents taking physical delivery of the commodity. If you are
going to use futures contracts, please check with your brokerage to see if they
implement this practice which can protect you.

Some cash settled contracts at the CME Group are found here: CME Cash Settled Contracts. It is important for you to know whether the futures contract is settled in cash or the physical. As stated before, if you as an investor allow a futures contract to expire, you could be looking for a place to store the physical of the commodity which the contract represents.

A stock has the potential to hold its
value indefinitely. As long as the price of the stock does not go to zero,
stock will have some value. A futures contract is finite; it will expire
according to its pre-determined time. After expiration, a futures contract will
no longer retain any value.

Hedgers can use futures contracts as a method
to manage their business

At one time, futures were used primarily to
give farmers a hedge against fluctuations in the price of the product they
produced. A futures contract could give them the ability to remove some of the
price risk, due to the potential fluctuations in the value of their product.

To illustrate, let's say we have a
farmer who is a producer of corn. We also have a manufacturer who would like to
use corn to manufacture canned corn.

If you are a farmer/producer, you most
probably are worried about one thing – a drop in the value of your commodity,
which in this case is corn.

When the farmer is planting his crop,
he is concerned about the price he will get for his corn when the corn ripens
at a future date. The farmer wants to get the best price possible, so he can
create profit for his business. He runs the risk of the price of corn dropping
between the time he plants the corn and when it is harvested then brought to
market.

The farmer and the manufacturer are able to use futures to protect
themselves …

The farmer and the manufacturer enter
an agreement. The agreement is in the form of a futures contract. The farmer
wants to get 4 cents per bushel for his corn, three months in the future when
his crop will be harvested, which will allow him to make a profit. The farmer
agrees to sell his corn to the manufacturer of canned corn for 4 cents per
bushel. The manufacturer has determined buying corn today at 4 cents per
bushel, which will be available three months in the future, will net a profit
for his company.

If the price of the corn rises to 5
cents per bushel in three months, the farmer in a sense will lose 1 cent per
bushel. The farmer agreed to sell the corn for 4 cents per bushel at a specific
date. The manufacturer will be happy
because he is getting the corn for a 1 cent per bushel discount.

The manufacturer had a greater
benefit, but both parties should be happy because they should make a profit
according to their projected cost analysis. In a sense, both parties have won.

The futures contract reduced the risk
of the farmer/producer and the manufacturer because they will be able to close
the contract at the end of the three month period, at the price of 4 cents per
bushel.

Leverage and Futures

It is important to understand that trading futures is not for
everyone. Because futures are used for
speculation as well as a portfolio hedge for investors, they can carry the
potential for large losses.

Leverage allows a trader to enter a position in futures that is
worth much more than the up-front margin requirement.

Leverage is represented as a ratio. For example, let's say that the leverage on a
particular futures position is 20:1.
This means that if you have $5,000 in your trading account, you could
enter a futures position that is worth 20 times that amount, or $100,000.

Leverage makes it possible to trade larger positions. It may
appear tempting for some newer traders.
It's important to remember that leverage magnifies BOTH profits and
losses.

If you plan to trade futures, be sure to have a complete
understanding of how your broker handles the margin and leverage requirements.

Wrapping up futures contracts…

A speculator/investor can use futures
contracts to create potential profits. Speculators/investors can place educated
bets on the price of the futures contract going up or down. Most futures
contracts are exited before expiration. For instance, a buyer of a futures
contract can sell the contract before expiration so he is no longer in the
position.

Futures contracts span a wide array of different assets. For example, there is corn, wheat, coffee,
oil, gas, gold, silver, bonds, and stocks.

Hedgers can use futures to protect
themselves from future fluctuations in the price of a underlying asset. They do this by locking a specific price at a
specific time. A hedger in the futures market can have a plan to buy or sell a
commodity such as corn. The hedger will
then buy or sell a futures contract to secure and lock in a particular
price. The price at which the hedger
buys the futures contract locks in that price which protects the hedger from
rising or falling prices.

It is important to determine how much money you have to
invest. Some futures contracts require
more capital than others.

If you need to monitor your futures contract often it’s important to trade a futures contract which corresponds with the times you are available. Futures for the most part have certain times of the day when there is more activity. If you are trading a contract which is more active when you are available, it can be to your advantage. Usually there are better fills and more liquidity when there is more volume.

If you need to hedge against the volatility in the market, futures
could offer protection.

There are many strategies used by experienced traders who trade futures both for hedging and speculation. Aeromir is a great place to learn.

There are numerous choices available today for those looking
to invest their capital as a means of income.
Today we will talk about the two most traded investment vehicles … the
stock market and the bond market.

It’s important for any investor to understand the
differences between stocks and bonds when planning their investment plan and
strategies, depending on their overall income goals.

Stock Market

Stocks, also called equities, are traded in shares on a
publicly owned company. Buying stocks,
or a derivative of a stock such as options or futures, represents purchasing a
small stake in the company. Stocks are
traded on stock exchanges.

The main stock exhanges in the USA include:

New York Stock Exchange (NYSE). The NYSE is the world’s largest exchange, based on the market cap of securities listed. Many of the largest public traded companies are listed on the NYSE. The inception of the NYSE took place on May 17, 1792. In an effort to organize securities trading in New York City, the Buttonwood Agreement was signed by 24 stock brokers at the location of 68 Wall Street … and trading began on the New York stock Exchange. Folklore has it that the signing of this historic agreement took place under a buttonwood tree.

Buttonwood Tree

Nasdaq. The Nasdaq is an electronic, worldwide exchange listing securities of smaller companies from around the world. Financial and technical stock make up the bulk of this exchange. However, the Nasdaq also includes utilities, consumer products, and those companies in the healthcare industry.

American Stock Exchange (AMEX). The American Stock Exchange, also known as the NYSE American Exchange, was initially known for introducing new asset classes and products. Also an electronic exchange, the AMEX was the first to introduce ETF’s (Exchange Traded Funds) in 1993.

The main function of the stock market is to provide a
regulated environment where buyers and sellers come together for the execution
of their trades. These regulations
insure traders that all transactions are done openly, with pricing that is
honest and fair. This controlled
environment also helps the companies whose securities are listed on that
particular exchange.

What are the components of the stock
market?

The primary market is held for the initial
public offerings (IPOs) by first-run equities.
Underwriters facilitate this primary market, and set the initial prices
for the securities being offered.

The secondary market then opens up; this is
where the most trading activities are placed.

Bond Market

Basically, bonds are a fixed-income loan the investor
provides to a corporate or government entity.
The bond market is also known as the credit or debt market. When you purchase a bond, or a credit/debt
security, you are actually providing a loan for a particular period of time,
and charging interest. This is the same
way banks provide loans to customers.

Unlike the stock market, the bond market does not have a
centralized location to trade. Without
this central location, bonds are sold over the counter (OTC).

What are the components of the bond
market?

There are three main components in the bond market:

Issuers.
Issuers are entities that are behind the development, registration, and
selling of instruments on the bond market.
Issuers operate in the same manner whether they are government entities
or corporations.

Underwriters.
Underwriters, for the most part, evaluate risks in the financial
world. An underwriter in the bond
market buys securities from the issuers, and then resells them for a profit.

Participants. Participants in the bond market
are entities who purchase and sell bonds and related securities. By purchasing bonds, the participant is
issuing a loan for the length of the security.
The participant receives interest in return for the loan, and at
maturity the participant collects the face value of the bond.

How are bonds rated?

There are bond rating agencies who give an investment
“grade” to bonds. Standard & Poors
and Moody’s are examples of two bond rating agencies. Example of bond ratings are “AAA” or “A”,
meaning a high quality/lower risk investment.
A bond with a rating of “A-“ or “BBB” is considered to have medium
risk. Any bond with a rating of “BB” or
lower is viewed as a high-risk investment.

What are the differences between the
stock market and bond market?

A major difference between the stock market and
the bond market is the risk involved. In
the stock market, investors have risks associated with economic events,
geopolitical news, interest rates, etc.
The overall stock market tends to move up when all is quiet on the
“news” front. With bonds, it
tends to be the opposite… when interest rates rise, bond prices may move
down. Bonds also put the investor at
risk with their rating … if you purchase a bond from a company that does not
have a stellar bond rating, you are putting yourself at risk.

Some analysts believe that investing in certain
sectors of the bond market are less risky than trading in some sectors of the
stock market, which can be prone to higher volatility swings. One example is investing in U.S. Treasury
securities, considered to be a low-risk bond investment.

The size of the bond market compared to the
stock market is very similar. Based on
total capitalization, the stock market has about $30 trillion market cap, and
the total amount of debt owed through bonds is just over $40 trillion market
cap.

Investors looking for a faster return on their
capital may look to the stock market for their portfolio. However, while the bond market may not
provide that same opportunity for shorter term higher gains, it can have its
place balancing investment portfolios with a steady return. Some choose to hold bonds as a way to save
for long-term needs.

In summary, both the stock market and the bond market
provide many opportunities for investors.
Building a portfolio which includes both stocks (or their derivatives)
and bonds may be a viable direction for you to consider. As always with any form of investing, be sure
you have a complete understanding of the risk:reward before investing live
capital.

Brokerages have changed significantly over the past 20 years. Aspiring traders with small accounts now can participate with much smaller accounts than in the past.

When first thinking about trading, most if not all traders start with stocks. However, the cost of buying shares to trade can quickly use all of the cash in a small account. I consider a small trading account as one of $5000 or less. There are a vast number of interested traders with accounts of $500 or less.

These traders quickly find out that they have to trade leveraged assets to have an ability to trade at all. This pushes them into assets like futures, forex, and options. You can learn to use options with a small account and limit risk in trades.

Many changes have taken place that has made trading options less costly, including free. There are now ways to limit risk that make it very easy to start trading with accounts of less than $1000.

These are a few of the most significant changes that have helped change the playing field for the retail investor.

Commissions

In the past, the typical brokerage would charge an options trader a ticket charge (minimum) per trade PLUS a fee per options contract. While this is still a widespread practice, most if not all brokers offer commissions based on a per option charge only. If you are paying a ticket charge, you should call your broker immediately and change to per option only.

Paying over $1 per option is too high.

Tastyworks offers a commission structure where you only pay to put on a trade and not to close it out, which can save you even more money over time.

Robinhood is an online broker offering no commissions to trade. Their trading platform is terrible. You need to spend some time learning it, but you can trade and not pay any commissions to do so.

As of this writing, I opened an account and funded it with $100 and am making trades. The bottom line is that commissions should no longer be a hurdle in getting started trading since there is no cost to overcome if you use a broker like Robinhood.

Strike Widths

One of the basic strategies options traders learn and begin with is credit spreads. These are high probability trades that are out of the money.

When I first started trading spreads, the strikes were 5 points apart. This meant that I would need $500 per trade minus my credit to trade one spread. Even in a $5000 account, you can't trade many of these every month as each trade would take up 10% of the account value.

Today there are many stocks with strike widths of 2.50, 1.00, and even .50. The margin needed for an options spread with 0.50 strike separation is $50 minus the credit you received. You can see how this would make trading and risk much easier when you are going into a trade with $50 vs. $500. It is a huge advantage for traders today.

Weekly Options

When I started trading back around 2000, I could only trade options that expired every 30 days. This limited the amount of turnover or trades I could make. You can open and close trades within that period as much as you want, but it does limit the choices you have.

Today, a large percentage of stocks and indexes have weekly options that provide more bang for the buck in the shorter expirations due to how Theta decays. If you don’t like one option contract that is expiring soon, you can look to the next weekly out in time or the next. The choices are much bigger today providing opportunities that just didn’t exist with only monthly expirations.

Putting is all together – A comparison of two spreads

The old: Commission of $6.95 per trade plus $1.50 per option.

5 dollar WIDE SPREAD WOULD COST $13.90 + $6 = $19.90 to enter and exit a trade plus $500 of margin. The cost alone is 4% of the margin that would have to be over come by profits. The new: Zero Commissions

One typically overlooked advantage of small width spreads is that the ROI tends to be better the smaller the width is versus trading wider spreads. This isn’t always the case but typically holds true and is worth investigating.

Calls and Puts are exchange-traded option contracts that were originally designed to act as insurance mechanisms to protect financial positions. These options are contracts between a buyer and seller that give the buyer a right and the seller an obligation to buy or sell a security at a specific price (the strike price) on or before the option’s expiration date. Each option contract represents 100 shares of the underlying security.

Here is a quick summary for buyers and sellers of calls and puts:

The Call buyer

Wants the underlying security to go UP

Has the RIGHT to exercise the option of BUYING the security at the strike price

The Call seller

Wants the underlying security to go DOWN

Has the OBLIGATION to SELL the security at the strike price IF THE OPTION IS EXERCISED BEFORE IT EXPIRES.

The Put buyer

Wants the underlying security to go DOWN

Has the RIGHT to exercise the option of SELLING the security at the strike price

The Put seller

Wants the underlying security to go UP

Has the OBLIGATION to BUY the security at the strike price IF THE OPTION IS EXERCISED BEFORE IT EXPIRES

Discussion and Examples

Call Options

XYZ stock is trading at $100 per share

XYZ stock DEC 100 calls are priced at $5.00.This means the XYZ stock call option has a $100 strike price, expires in December and is trading at $5

The call buyer will pay the call seller $5.00 times 100 shares = $500 for the RIGHT to purchase XYZ stock at $100 before the December expiration date. If XYZ rises above $105, the call buyer will make money as they can “exercise” the option to purchase XYZ at $100, and sell XYZ in the market at a higher price. The call buyer loses the $5.00 paid for the option so his “break even” price is $105.00

The call seller has the OBLIGATION to deliver XYZ stock to the call buyer anytime before the December expiration at $100 per share. If XYZ stock is trading below $100 per share on the expiration date, the call “expires worthless” and the call seller keeps the $5.00 he sold the call for. If XYZ price is over $100 per share, it will be “called away” and the call seller will have a loss as he will have to provide the call buyer XYZ stock and only receive $100 per share for it. Breakeven price for the call seller is also $105. If XYZ expires at $105, the call seller has to provide the stock to the call buyer at $100 per share and purchases the same 100 shares in the market at $105, but he can keep the original $5 received for selling the call option.

Put Options

XYZ stock is trading at $100 per share

XYZ stock DEC 100 puts are priced at $5.00.This means the XYZ stock put option has a $100 strike price, expires in December and is trading at $5

The put buyer will pay the put seller $5.00 times 100 shares = $500 for the RIGHT to sell XYZ stock at $100 before the December expiration date. If XYZ falls below $95, the put buyer will make money as they can “exercise” the option to sell XYZ at $100, and buy XYZ in the market at a lower price. The put buyer loses the $5.00 paid for the option so his “break even” price is $95.00

The put seller has the OBLIGATION to sell XYZ stock to the put buyer anytime before the December expiration at $100 per share. If XYZ stock is trading above $100 per share on the expiration date, the put “expires worthless” and the put seller keeps the $5.00 he sold the put for. If XYZ price is below $100 per share, it will be “put to the put seller” and the put seller will have a loss as he will have to sell XYZ stock to the put buyer and have to pay $100 per share for it. Breakeven price for the put seller is also $95. If XYZ expires at $95, the put seller has to purchase the stock from the put buyer at $100 per share and sell the same 100 shares in the market at $95, but he can keep the original $5 received for selling the put option.

Time Decay

Options lose value as they get closer to expiring. This time decay, or THETA, accelerates in the final thirty days of the option contract’s life.

Underlying Security Price Movement

If a security has a fast move in the correct direction the option buyer will have the advantage.

If the price movement is UP, call buyers benefit.

If the price movement is DOWN, put buyers benefit.

If a security moves slowly or trades in a range, the option seller has the advantage.

Options with strike prices closest to the current underlying security price change in value the fastest. If you do expect a security to move, avoid options far “out of the money”, or far above the current price for calls or far below the current security price for puts.

CAUTION

Options are leveraged and can expose you to significant risk. Sellers of calls have unlimited risk if the security price moves up. Sellers of puts have nearly unlimited risk if the security price moves down. Always strive to limit your risk either through the strategy or using conditional orders at your broker. Conditional orders may not help if the underlying security gaps up or gaps down in price. It is often best to establish limited risk option positions as an option seller using combinations of options trades, or spreads, to limit your risk. This avoids the price gap risk of the underlying security.

I hope this answers your basic questions about calls and puts. I’ll be adding more articles expanding how to use calls and puts together in spreads and in combination with the underlying security.

Dr. Daniel Lyons is a long-time friend and the creator of ExperCharts software, which I'll be using to generate signals for the ExperSignal trade alert service.

Daniel has PhDs in Cosmology and Applied Mathematics. His hand print algorithms he created many years ago have been applied to the financial markets. Daniel trades the FOREX market using 10-minute bars. He is giving me a longer time frame version that is more suitable for options trading.

Daniel limits the degrees of freedom to maintain reliability and consistency over time. ExperCharts has over 350,000 lines of C++ code already.

As you can see from the charts above, the software is very unique. The Neural Candles remove noise, which makes trend detection simple.

There are hundreds of millions of calculations every second that Daniel distills into charts, indicators and his engines. The result is a simplified view of the market in question with sophisticated tools to aid in determining if the market is turning or not.

The Trade Alert Service

Like many new things, unforeseen delays have pushed the launch of ExperSignal back. Daniel keeps getting closer to sending a fully debugged version to me so I can start the ExperSignal trade alert service.

THIS HAS NEVER BEEN TRADED BEFORE. HYPOTHETICAL PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

The initial testing I did was VERY encouraging.

With a four-month backtest using a simple futures-only trading strategy, the test generated over $11,000 of profit using about $12,000 of margin. The biggest drawdown was -$750 with one of the two losing trades.

Daniel is including a spreadsheet with the price data and indicator values over time so I can refine what trading strategies to offer in the trade alert service.

I anticipate have several flavors of trades available:

Futures-only

Shorter-term options strategies

Longer-term options strategies

I don't have a launch date yet, as I'm waiting for Daniel to finalize the current version. It is getting much closer each day.

NOTE: After this version is sent to me, Daniel and I are going to discuss adding ES futures to ExperCharts. The software can handle it but Daniel doesn't have data for it as he only trades FOREX. The intention is definitely to add ES to ExperCharts so I can do futures and futures options strategies on ES, which has much more liquidity than the FOREX currency futures and futures options.

Ophir Gottlieb, CEO of Capital Market Laboratories, is speaking next week about their TradeMachine.

I looked at the TradeMachine several years ago while it was relatively new. In the past several years, it has matured into a very powerful back trading and alerting system.

So powerful in fact that banks and hedge funds now use it.

Who is Ophir Gottlieb?

Ophir Gottlieb is a former options market maker on the NYSE ARCA and CBOE exchange floors and a former Hedge Fund manager. He was recently invited to speak at the CFA Institute's annual conference in the United Kingdom about AI and his practical application to finding alpha.

Ophir is coming to Aeromir on Thursday 18 July 2019 at 11:00am Eastern to show us his TradeMachine and how he uses it.

What is the CMLViz TradeMachine?

If you haven't heard of the CMLViz TradeMachine, Ophir had two demonstrations recently. One is nearly two hours long and was very comprehensive. The second was an eight-minute quick walkthrough. Here are links to those demonstrations:

The CMLViz TradeMachine identifies patterns that have persisted for as much as 15-years, including through the Great Recession, and applies those patterns to option trading.

Here is an example of a simple covered call strategy. I used the S&P 500 as the universe of stocks to search and sorted the results by the total Backtest return. The test was the last three-years and selling a 30 Delta call, 30-days before options expiration.

The grey line on the chart below is the S&P 500 hypthetical baseline returns.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

These results were generating in 10-15 seconds! Try doing that in OptionVue or OptionNET Explorer!

Ready to Get the TradeMachine Now?

Once you lock in your subscription price, you will keep that rate as long as you maintain your subscription. Ophir said he intends on raising the price next year to possibly $499/month. Now is a great time to get your subscription started.

Summary

The CMLViz TradeMachine is agreat investment research tool. You can quickly find candidates to manually backtest. Once you find your preferred strategies and symbols, you can set up alerts to be notified when your backtested trade setups have fired trading signals.

A diagonal spread may be a strategy you would like to implement into your trading arsenal. Today we will discuss how a diagonal spread is created. We will also reveal some of the advantages and disadvantages of a diagonal spread.

A diagonal spread is a strategy
which occurs when two options are bought or sold. These two options use the
same instrument. These two options are of the same type, either two calls or
two puts. The two options are at different strike prices, as well as two
different cycles of expiration.

When a long diagonal spread is
initiated, it can either be a net debit or a net credit to your account. A long
diagonal spread consists of an option which you buy with more days to expiration
than the option which you sell with less days to expiration. The strikes which
are bought or sold to create the diagonal spread will determine if the spread
is a debit or credit.

An Example of a Bullish Diagonal
Spread

A bullish diagonal spread can be
composed by buying an in-the-money call option far out in time. Then, you would
sell an additional call option with a dissimilar strike price which is usually
a little out-of-the money, along with a closer expiration date.

Below is a risk graph of an example of a Call Diagonal
Spread on SPY. This position has a
bullish bias.

Figure A. SPY Call
Diagonal Spread from Think or Swim

The setup for the bullish diagonal in Figure A is as
follows:

Purchase an in-the-money call, 376 days to expiration. The call purchased is the June 19 2020 280 strike.

Sell a slightly out-of-the-money call, 45 days to expiration. The short call is the July 19 2019 289 strike.

If you are able to keep an eye on your trade more often, you could explore selling shorter term options which could result in more opportunities to sell multiple cycles using the same long option. Of course, you do have more gamma risk with weekly options. Each cycle that you sell and are able to accrue a profit will lower the cost basis of the long call purchased.

How a Bearish Diagonal Could Be
Constructed …

Now let's look at the setup for a
bearish diagonal. Figure B below is an
example using SPY.

Figure B. SPY Put Diagonal Spread from Think or Swim

The example shown in Figure B above is a setup for a bearish diagonal spread; meaning you think SPY will move down. The setup for this diagonal is as follows:

Purchase a long term in-the-money put, 376 days to expiration. The put purchased is the June 19 2020 295 strike.

Sell a slightly out-of-the-money put. The short put is the July 19 2019 284 put.

The diagonal can also be used in a
similar manner as a covered call.

A covered call can tie up a lot of capital, because you have to purchase at least one hundred shares of stock to create the basis for a covered call.

A diagonal can help to diminish these capital requirements.

For example, a diagonal spread
could be created by buying an in-the-money call option 12 months or more in the
future. This call option would immediately have intrinsic value due to it being
in the money.

Using the above SPY example in
Figure A, SPY is trading at $288. The
call purchased in this example is the Jun 19 2020 280 call, which has $8.00 of
intrinsic value because it is in-the-money by $8.00. The long option would be a type of stock
substitute, as compared to purchasing 100 shares of stock which would be
required for a covered call.

Due to buying the option further
out in time, which in this case is 12.5 months, there will be some time premium
added to the price of the option. Most of this options' premium or cost will be
the intrinsic value and the rest will be time value.

Using this same example, the $280
SPY option strike cost was $22.82 and $8.00 of the premium for the option is
the intrinsic value. The other $14.82 of the premium, or cost of the option is
the time value of the option.

What is the maximum profit potential of
a diagonal spread?

The exact maximum profit
potential in a diagonal spread can't really be calculated because of the
position is using two expiration cycles.
However, to give you an idea as you analyze a potential position the
profit potential can be estimated with this formula:

For a bullish call diagonal spread, the width of
the call strikes, less the net debit paid, is the approximate maximum profit.

For a bearish diagonal spread using puts, the
same formula applies … the width of the
put strikes less the debit paid equals the approximate profit.

What is the breakeven of diagonal spreads?

Once again, the exact breakeven cannot be calculated because of the different expiration cycles of the options in the spread. To give you an idea, however:

For a bullish call diagonal, the approximate breakeven can be calculated by taking the price paid for the long call, plus the net debit paid.

For a bearish diagonal spread using puts, the same formula applies … take the price paid for the long put, minus the net debit paid.

Some Key Facts about Diagonal Spreads
…

Many traders use diagonal spreads as directional strategies. In this instance, your goal when entering the trade is for the price of the instrument to trade to the short strike option you sold, but not to go beyond the short strike. If the price of the instrument crosses above the short strike of the option you sold, you may want to roll the option out in time and out in price. Or, you could close the short option position before expiration day, if the option has gone in the money. Keep in mind, however, if you choose the keep the position open and the short has gone in-the-money, you run the risk of assignment.

3-6 Emails per day discussing Scott's views on the current market and how he is planning to trade it

50 Weekly education webinars (ever Wed) per year

Scott's paper money account is up about +90% for the year already and we're not even to the mid-point.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

Scott and I wanted to offer Scott's trades at a lower price point so Scott created Mini-POT, which is nearly identical to the full POT class but with only one educational webinar per month plus an added Live Q&A webinar per month.

The trades are the same. The emails are the same.

Mini-POT subscribers won't have the same level of personal help from Scott but it's half the price of the full POT class.

Scott showed his background, his trading philosophy and ran through an example trade before answering questions about Mini-POT. Watch the replay here:

Click the button below to join the new Mini-POT trial, which is planned to last one month.